Selling a GmbH Despite Insolvency – What Is Possible?

Selling a GmbH can be an option even in extreme situations—such as when the company is already insolvency-ready. In such cases, many managing directors ask the crucial question: "Am I even allowed to sell?"

This article explains the legal boundaries, risks, and options for a sale in crisis—and shows when there is still room for a structured business sale despite insolvency readiness.

What exactly does insolvency readiness mean?

Insolvency readiness refers to the state in which a company is no longer able to meet its payment obligations or its debts exceed the available assets. For a GmbH, this specifically means: The legal requirements for filing for insolvency are met.

When is a GmbH insolvency-ready?

A GmbH is insolvency-ready when one of the two statutory insolvency grounds under the Insolvency Code (InsO) applies:

Inability to pay under § 17 InsO occurs when the company is no longer able to fulfill its due payment obligations. As a rule of thumb: If more than 10 percent of the due liabilities cannot be serviced, insolvency readiness due to inability to pay is present.

Over-indebtedness under § 19 InsO means that the GmbH’s assets no longer cover its existing liabilities and there is no positive going-concern prognosis. A positive going-concern prognosis requires that the company will, with a high probability, survive the next 12 months.

What obligations arise upon insolvency readiness?

If one of these conditions occurs, the managing director is legally obligated to file for insolvency with the competent local court within three weeks. This deadline starts with the occurrence of insolvency readiness, not with its discovery.

If this deadline is missed, serious consequences follow: criminal prosecution for delayed insolvency filing under § 15a InsO and personal liability of the managing director for payments made after insolvency readiness.

Is it even allowed to sell an insolvency-ready GmbH?

What does the law say about selling during insolvency?

In principle: After insolvency readiness has occurred, the managing director may no longer freely sell the company. The law prohibits any actions that diminish the GmbH’s assets or disadvantage creditors.

The rationale is clear: The remaining assets of the insolvency-ready GmbH serve as the liability pool for creditors. A sale below fair market value would reduce this pool and disadvantage creditors.

Under what circumstances is a sale still possible?

Despite these fundamental restrictions, there are limited exceptions that allow a controlled sale:

Sale before formal insolvency readiness: If insolvency readiness has not yet definitively occurred but is imminent, a quick sale may still be legally permissible. The prerequisites are an objectively fair purchase price and full disclosure of all risks to the buyer.

Structured proceedings: In specialized insolvency procedures such as protective shield proceedings or through a transfer-based restructuring, a sale can take place under court supervision.

Pre-insolvency restructuring: The StaRUG procedure (Act on the Stabilization and Restructuring of Companies) enables restructuring without formal insolvency proceedings, where a sale can also be part of the solution.

How does a sale shortly before insolvency work?

What requirements must be met?

A sale shortly before insolvency readiness is only possible under strict conditions. The managing director must be able to prove that no formal insolvency readiness existed at the time of sale.

Objectively fair purchase price: The sale price must correspond to the actual value of the company. A sale below value is not permitted as it would disadvantage creditors.

Full transparency: All known risks, liabilities, and critical circumstances must be disclosed to the buyer. Concealing the true situation can lead to legal consequences.

Creditor protection: The sale must not result in creditors being worse off than they would be in insolvency proceedings.

What should managing directors keep in mind?

The managing director bears the burden of proof that insolvency readiness did not exist at the time of sale. This requires careful documentation of the financial situation, including current liquidity plans and company valuations.

Additionally, the sales process should be professionally managed to minimize legal risks and ensure compliance with all regulations.

What sales strategies exist after filing for insolvency?

How does transfer-based restructuring work?

Transfer-based restructuring by the insolvency administrator is one of the most common ways to "sell" an insolvent company. Here, the GmbH as a legal entity is not sold, but its valuable assets.

Asset deal instead of share deal: The insolvency administrator sells the GmbH’s assets—including machinery, customer base, trademarks, real estate, and other economic goods—to a buyer. The old GmbH with its debts remains and is later liquidated.

Advantages for the buyer: The purchaser acquires only the desired assets, not legacy liabilities or hidden debts. Employment contracts can be transferred to the new owner under § 613a BGB (German Civil Code) through business transfer.

Preservation of business operations: Despite the legal separation between old and new company, the operational business can continue seamlessly. Ideally, customers notice nothing of the insolvency.

What is a protective shield proceeding with a pre-pack?

The protective shield proceeding under § 270b InsO allows the management to restructure the company under self-administration. Combined with a pre-negotiated buyer (pre-pack), the sale can be structured and controlled.

Self-administration: Unlike regular insolvency, management retains control over the company. A supervisor only monitors the process.

Pre-negotiated solution: Negotiations with a potential buyer take place before filing. After opening the proceeding, the transaction can be quickly executed.

Court approval: The sale is conducted under court supervision, providing legal certainty for all parties.

How can the StaRUG procedure assist with the sale?

The Act on the Stabilization and Restructuring of Companies (StaRUG) offers the possibility of restructuring without insolvency proceedings. If insolvency readiness is imminent but not yet present, a sale can be part of the restructuring plan.

Creditor approval: Creditors must approve the restructuring plan, which can include a sale. Individual dissenting creditors can be overruled.

Investor entry: Often, not the entire company is sold, but an investor steps in and brings fresh capital for restructuring.

Avoidance of insolvency: The procedure aims to avoid insolvency and stabilize the company.

Which investors buy insolvency-ready companies?

Who are the typical buyers in crisis situations?

Distressed investors specialize in acquiring distressed companies. They have the necessary expertise and financial resources to take over and restructure troubled businesses.

Strategic buyers from the same or related industries often see insolvency-ready companies as opportunities to gain market share, realize synergies, or eliminate competitors.

Management buy-out teams consist of existing management or executives who want to take over the company themselves.

What motivates buyers to acquire insolvency-ready companies?

Attractive valuations: Insolvency-ready companies are often sold well below their intrinsic value, offering attractive return potential.

Debt-free acquisition: In asset deals, the buyer assumes no legacy debts, only the valuable assets.

Market consolidation: Strategic buyers can strengthen their market position and eliminate competitors through acquisition.

Restructuring opportunities: Experienced investors often see potential to increase value through operational improvements, cost reductions, or realignment.

What risks exist when selling during insolvency?

What legal risks threaten the managing director?

Avoidance risk: Sales after insolvency readiness can be challenged retroactively. This is especially true if the sale price was below market value or creditors were disadvantaged.

Personal liability: Managing directors are personally liable for damages caused by unlawful actions after insolvency readiness. This can include payments to preferred creditors.

Criminal consequences: Delayed insolvency filing is punishable. Those who file too late or continue operating after insolvency readiness risk imprisonment.

What risks exist for the buyer?

Due diligence challenges: Examining an insolvency-ready company is complex and time-consuming. Hidden liabilities or legal risks may be overlooked.

Avoidance risks: Buyers can also be affected by avoidance proceedings if the sale is found to be unlawful.

Reputational risks: Acquiring an insolvent company can negatively impact the buyer’s image.

Integration difficulties: Integrating a troubled company into existing structures is often more difficult than expected.

How do I prepare a sale in crisis?

What steps are necessary before the sale?

Honest assessment: A ruthless analysis of the financial situation, including all liabilities, assets, and future cash flows, is indispensable.

Legal review: Determining whether insolvency readiness exists or is only imminent should be done by an experienced attorney.

Company valuation: An objective valuation is necessary to determine a fair sale price.

Professional support: Restructuring experts, lawyers, and M&A advisors should be involved early.

How do I communicate with creditors and stakeholders?

Transparent communication: Openness towards key creditors can build trust and increase willingness to cooperate.

Early involvement: The earlier stakeholders are informed about the situation, the greater the chance of a cooperative solution.

Professional moderation: Creditor meetings and negotiations should be moderated by experienced advisors.

What alternatives to selling exist?

Restructuring without sale: Sometimes the company can be saved through cost reductions, restructuring, or fresh capital without selling.

Partial sale: Instead of selling the entire company, individual business units or subsidiaries can be sold.

Liquidation: In some cases, orderly liquidation is economically more sensible than a sale below value.

Conclusion: Sale despite insolvency readiness – opportunities and limits

Selling a GmbH despite or in the face of impending insolvency is only possible within narrow legal limits. The key insight: timing is crucial. The earlier action is taken, the more options are available.

Managing directors must take legal risks seriously and seek professional advice. A sale after insolvency readiness has occurred is generally no longer possible—unless it takes place in structured proceedings such as transfer-based restructuring or protective shield proceedings.

For buyers, interesting opportunities exist, but such transactions require special expertise and thorough due diligence. The acquisition usually occurs as an asset deal, thereby avoiding legacy liabilities.

Practice shows: With proper preparation, professional support, and transparent communication, a structured handover can still be achieved even in crisis. Acting early and complying with all legal requirements is essential.